Business Context and Reporting Period
This Form 10-Q covers The Washington Post Company for the thirteen and thirty-nine weeks ended October 2, 2005. The Company operates through five primary segments: Newspaper Publishing, Television Broadcasting, Magazine Publishing, Cable Television, and Education (Kaplan). The reporting period includes significant operational impacts from Hurricane Katrina on the Cable division and continued growth in the Education segment.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Oct 2, 2005 | 39 Weeks Ended Oct 2, 2005 |
|---|---|---|
| Operating Revenues | $873,662 | $2,605,169 |
| Income from Operations | $112,384 | $358,068 |
| Net Income | $66,558 | $211,904 |
| Diluted EPS | $6.89 | $21.93 |
| Cash and Equivalents | $170,310 | $170,310 (Balance Sheet) |
| Net Cash from Operating Activities | N/A | $387,464 |
| Total Debt Outstanding | $429.1 million | $429.1 million |
| Working Capital | $23.0 million | $23.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 7% in the third quarter and 9% year-to-date compared to 2004, driven primarily by the Education division (up 24% Q3, 25% YTD) and Newspaper Publishing.
- Operating Income Decline: Despite revenue growth, operating income fell 20% in the third quarter and 8% year-to-date. This was largely due to Hurricane Katrina impacts on the Cable division and declines in Television Broadcasting and Magazine Publishing.
- Net Income: Net income decreased 19% in the third quarter ($66.6M vs $82.5M) and 7% year-to-date ($211.9M vs $226.8M).
- Segment Performance:
- Cable: Operating income dropped 80% in Q3 due to an estimated $18.5 million adverse impact from Hurricane Katrina (property loss, cleanup, and service credits).
- Television: Revenue and operating income declined significantly due to the absence of political advertising and Olympics-related revenue present in Q3 2004.
- Education: Operating income increased 28% in Q3, aided by a $9.8 million credit from the reversal of stock option accruals.
Outlook, Risks, and Unusual Items
- Hurricane Katrina: The Cable division recorded $9.9 million in property losses and $4.2 million in cleanup expenses. An additional $4.4 million reduction in operating income resulted from service credits to 94,000 subscribers. Insurance claims are being prepared, but no recovery amount has been recorded. Further recovery costs are expected in Q4 2005.
- Non-Operating Gains: Results include $8.6 million in pre-tax gains from the sale of marketable securities in Q3 and $12.0 million year-to-date. A $5.1 million gain from the sale of non-operating land was also recorded YTD.
- Capital Expenditures: CapEx for the first nine months was $164.7 million. The Company estimates full-year 2005 CapEx will range between $225 million and $250 million.
- Legal Contingency: Kaplan is named in a proposed class action antitrust lawsuit in California; the Company cannot currently estimate potential losses.
- Pension Assumptions: Changes in discount rates and mortality tables are expected to reduce the 2005 pension credit by approximately $4 million compared to 2004.
Investor Verification Checklist
- Verify the extent of insurance recoveries expected from Hurricane Katrina losses in the Cable division.
- Monitor the sustainability of Education division growth excluding the impact of stock option plan reversals and acquisitions.
- Assess the long-term impact of the decline in political advertising revenue on the Television Broadcasting segment.
- Review the status of the antitrust lawsuit against Kaplan and potential financial exposure.
- Confirm the Company's ability to meet the estimated $225M-$250M capital expenditure guidance for the remainder of 2005.